March 25 (Bloomberg) -- Spain’s government bonds fell, with
10-year yields rising the most in almost four weeks, as a
bailout agreement for Cyprus failed to convince investors that
fallout from the nation’s banking crisis would be contained.

Italy’s securities dropped for the first time in four days
as Reuters reported Dutch Finance Minister Jeroen Dijsselbloem
as saying the Cypriot rescue plan, which included losses for
some bondholders and depositors, may become a template for euro-area bank bailouts. Cypriot lawmaker Nicholas Papadopoulos,
chairman of the parliamentary finance committee, said the nation
must explore the benefits of exiting the euro area. German bonds
advanced as investors sought the region’s safest securities.

“It’s a very blunt suggestion that uninsured depositors
are likely to contribute to banking bail-ins in future,” said
Owen Callan, an analyst at Danske Bank A/S in Dublin. “Spanish
and Italian bonds are falling and bunds are rising because it
suggests that Cyprus is not in fact a unique case.”

Spain’s 10-year yield climbed 10 basis points to 4.96
percent at 5 p.m. London time, the biggest increase on a closing
basis since Feb. 26. The 5.4 percent bond maturing in January
2023 declined 0.82, or 8.20 euros per 1,000-euro ($1,286) face
amount, to 103.35.

Disorderly Default

Cyprus avoided a disorderly default by bowing to demands
from creditors to shrink its banking system in exchange for 10
billion euros of aid. President Nicos Anastasiades agreed to
shut the country’s second-largest bank under pressure from a
German-led bloc of creditors in night-time negotiations.

The accord spares bank accounts below the insured limit of
100,000 euros, while imposing losses that two European Union
officials said would be no more than 40 percent on uninsured
depositors at Bank of Cyprus Plc, the island’s largest bank,
which will take over the viable assets of Cyprus Popular Bank
Pcl, the second largest.

“We wish to stay in the euro zone but leaving the euro
zone now is a valid point that has to be explored because we are
going to enter into a very deep recession, high unemployment
with no prospect of growth and we need to examine if there are
other ways to solve these hurdles,” Papadopoulos said in a
Bloomberg Television interview with Ryan Chilcote in Nicosia.

‘Similar Fate’

Bill Gross, who runs the world’s biggest bond fund at
Pacific Investment Management Co. in Newport Beach, California,
wrote in a Twitter post that “Cyprus haircuts prove just 1
thing: without growth, highly indebted EU countries will
eventually suffer a similar fate.”

German bunds have returned 0.5 percent this month through
March 22, according to indexes compiled by Bloomberg and the
European Federation of Financial Analysts Societies. Italian
bonds earned 1.3 percent and Spain’s gained 1.1 percent.

Italy sold 2.8 billion euros of zero-coupon bonds maturing
in December 2014 at an average yield of 1.746 percent, the
highest since Dec. 27. The country also auctioned 1 billion
euros of inflation-linked debt.

Belgium sold a combined 3.49 billion euros of bonds due in
2018, 2023 and 2032.

Volatility on Spanish bonds was the highest in euro-area
markets today, followed by those of Germany and Italy, according
to measures of 10-year debt, the yield spread between two- and
10-year securities, and credit-default swaps.